NY futures continue their rally this week

14 Aug '10

5 min read

However, we need to consider that the statistical season and the actual cotton season are not synchronized, since the statistical year begins on August 1, while the bulk of the Northern Hemisphere crops, which produce about 90 percent of total output, does not arrive in volume until October/November. With mills around the globe consuming about 10 million bales a month, they draw down stocks during August, September and October before new supplies begin to move in.

Therefore, if the statistical year were to begin on November 1 instead of August 1, beginning stocks would probably be down to just 25 million bales, which is extremely tight since there are other factors such as logistics and quality to consider. In other words, the global supply pipeline is about as tight as it can get without causing any panic.

The export sales report showed that for the week of August 5 an additional 346'200 running bales were committed for the current marketing year, while 20'500 running bales were added for 2011/12. This brings total commitments, including the 1.8 million bales that were carried over from last season, to 5.9 million statistical bales, which is the highest amount at this point in the season in 16 years.

The USDA estimates US exports for the current marketing year to reach 15.0 million bales, up 700'000 bales from last month, but even if the US were to ship that many bales it would still not be enough to close the foreign production gap.

So where do we go from here? The market is firmly in the grip of the bulls at the moment and we don't believe that this is going to change for at least another 3 months. The tightness is for real, stocks cannot be drawn down any further and available exports will not be enough this season to satisfy the current level of demand. The market will therefore have to ration demand via rising prices.

How high prices will need to climb to achieve this goal remains to be seen, but we don't seem to be quite there yet. Last week we thought that 85 cents would be a good upside target, but after this week's performance we cannot rule out spikes to 90 cents anymore. The downside appears to be very limited as there are plenty of traders who would like to buy the market on dips, among them the more than 8.0 million bales in unfixed on-call sales.

Plexus Cotton Limited

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